Know how much negative equity you really have.

Know how much negative equity you really have.

Did you call me delusional? 

Many homeowners are overly optimistic, even delusional, about how much their property is worth. They do not want to sell unless they can at least break even.  This mentality is similar to those who own stocks.  People are far more likely to sell a stock at a profit than sell a stock at a loss, instead hoping that it goes up before they sell it.  In many cases, they hold the underperforming stock for a very long time, all the while watching it decline in value.  Instead, if they sold the underperforming stock and invested the proceeds into a high performance stock, they would likely make more money, faster.

What Does Harvard Say?

Harvard’s Joint Center for Housing Studies calculated in July 2012 that about 11 million American homeowners owe more than what their house is worth.  Zillow.com estimates that the number is closer to 16 million, stating that about 33 percent of the people with mortgages are upside down.

Am I misinformed?

Most upside down homeowners believe that they cannot sell until housing prices return to the level they were at when they bought the house.  That belief is misguided, as mortgage lenders are approving short sales at a higher rate than ever before.  Some lenders are even approving short sales when the loan is current.  Since lenders usually absorb the loss in a short sale when they forgive the remaining debt, a short sale may be a worthy business decision for homeowners who are upside down.

Those who want to get back to a break-even level before considering a sale should find out what their property is really worth, with no fluff or fancy optimism.  If the property is worth 25 percent less than what it was when they bought it, they may need about a 25-30 percent increase in housing prices to reach that break-even level.  With at least 2 million foreclosures in the national pipeline, that 25-30 percent increase in values may be many years away.

With interest rates at historical lows and housing prices so inexpensive too, it may make sense to sell the current house at a loss or via a short sale.  Then one could purchase a home with a low interest mortgage and some built-in equity.  When housing prices rebound years from now, one would have positive equity instead of negative equity.

Homeowners who want to hold out until they reach a break-even level should examine how much money and time they are costing themselves while they wait just to hopefully break even.  For some, it may be well over a decade before they do.

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